Letter of Credit (L/c)

key principle underlying L/c is that banks deal only in documents and not in goods

Simply defined, is a written instrument issued by a bank at the request of its customer, the Importer (Buyer), whereby the bank promises to pay the Exporter (Beneficiary) for goods or services, provided that the Exporter presents all documents Documentary Credit is a widely used term to make payment secure in domestic and international trade.

Use of Letter of Credit

consideration in the course of negotiations between the buyer and seller method of payment is being discussed the seller has doubts about the credit-worthiness of the buyer and wishes to ensure payment

Different ways of payment:

buyer remitting cash with his order by open account whereby the buyer remits payment at an agreed time after receiving the goods or by documentary collection through a bank in which case the buyer pays the collecting bank for account of the seller in exchange for shipping documents

Export Letter of Credit Cycle

5. Product
is Shipped

1.

1.
2.
Application Applicant Importer/Buyer

Beneficiary Exporter/Seller

4. 6.
Letter of Credit

Buyer & Seller Agree

Documents

8.
Documents

2.

10. 3. Letter of Credit 7. Documents

Exporters Bank/ Advising Bank

9.

Importers Bank/ Issuing Bank

Benefits of a Letter of Credit

To The Exporter/Seller Letters of credit open doors to international trade by providing a secure mechanism for payment upon fulfillment of contractual obligations. A bank is substituted for the buyer as the source of payment for goods or services exported. The issuing bank undertakes to make payment, provided all the terms and conditions stipulated in the letter of credit are complied with. Financing opportunities, such as pre-shipment finance secured by a letter of credit and/or discounting of accepted drafts drawn under letters of credit, are available in many countries. Bank expertise is made available to help complete trade transactions successfully. Payment for the goods shipped can be remitted to seller own bank or a bank of seller choice.

Conti

To the Importer/Buyer Payment will only be made to the seller when the terms and conditions of the letter of credit are complied with. The importer can control the shipping dates for the goods being purchased. Cash resources are not tied up.

Types of Letter of Credit

Basic Types SIGHT OR TERM/USANCE

permit the beneficiary to be paid immediately upon presentation of specified documents may be revoked or modified for any reason, at any time by the issuing bank without notification. cannot be cancelled without the consent of the beneficiary issuing bank provided payment based on terms and conditions issuing bank has added a confirmation of payment. bank will make an additional charge

Revocable Letter of Credit

Irrevocable Letter Of Credit

UNCONFIRMED

CONFIRMED

Conti

Special Types

Red Clause Letter of Credit

Advance of shipment Beneficiary to act as a middleman Method of financing both sides of a transaction

Transferable Letter of Credit

Back-to-Back Letter of Credit

Deferred Payment Letter of Credit Standby Letters of Credit

Other Types

Documents Usually Required Under A Letter of Credit

There is no limit to the number and variety of documents

Draft - bill of exchange Commercial Invoice Consular or Customs Invoice Bill of Lading Air Waybill Insurance Policy or Certificate Certificate of Origin Inspection Certificate Packing List